Tuesday, November 1, 2016

Is Global Trade Beginning to Reverse?

In "A Little Noticed Fact About Trade. It's No Longer Rising", Binyamin Appelbaum provided several good reasons to be concerned about the global economy. He argues that the Walmart "revolution" is over, and notes that premature industrialization means (for instance) India is not following in China's footsteps, and of course there's the global political backlash to economic stagnation. The image of a single "lonely" Hanjin shipping container at California's Port of Long Beach in the NYT article, was enough to lower my spirits for a bit.

Hold that thought! While reading Appelbaum's post, an old song "Love Lies Bleeding" kept running through my mind, and I was fortunate enough to find it on YouTube. The last seconds of the song are missing but the live performance is impeccable:

There are a couple of points that complicate this issue. The first is that the drop in the dollar value of trade is the result of lower prices, not a smaller volume of goods and services being imported and exported...the actual amount of goods and services crossing U.S. borders was in fact higher in 2015 than in 2014, we were just paying less for what we imported and foreigners were paying less for what we exported to them.

Doubtless, some of these lower prices are a result of good deflation. Good deflation results from trade that "escapes" the less competitive pricing structures which non tradable sectors tend to impose on local citizens. Global trade - for instance - is largely unencumbered by the supply side restrictions which put pricing pressures on housing and time based services. One is reminded how George Selgin's production norm could apply for global trade, since it escapes the hostage taking of non tradable sector mark ups.

However, the ultimate paradox is that non tradable sectors deflect attention from their own (all too often arbitrarily) increased costs, by attacking inflation as a monetary policy construct which occurs far from their own influence in the marketplace. Inflation becomes a bogey to be "put down", as local interests encourage central bankers to reduce the necessary monies that should normally apply for all non tradable sector costs in aggregate. It's the monetary policy response to these tight money advocates, which contributes to a form of deflation which is anything but good.

Put another way, there's also a global bad deflation component, in what could otherwise appear as good global deflation - one which can be partially attributed to local producers imploring their central bankers to print less money. It's a shame that what happens locally, now transpires globally as well. In all of this, good deflation is a result of fortuitous supply side factors which contribute to long term growth. Whereas bad deflation is often due to the negative influence of supply side representatives on monetary policy makers. Bad deflation threatens long term growth potential, among plenty of other things. Dean Baker continues:

The big factors here were the sharp drop in oil prices and comparable drops in the price of many agricultural commodities that we export. It is not clear that this is bad for economic growth, but in any case the issue is not a drop in the quantity of goods and services crossing national boundaries.

Let's put Baker's assertion into perspective. Not so long ago, central bankers overreacted to what they perceived as negative supply side conditions, and turned what otherwise would likely have been a garden variety recession, into the Great Recession. Will central bankers negatively affect global trade to the same degree? Dean Baker seemed to question Appelbaum's negative reaction, but who has ascertained whether the drop in global trade is due to good versus bad deflationary factors.

If world trade is indeed at a turning point because of bad deflation in commodity prices, central bankers are likely playing a greater role in this occurrence than it may first appear. Dean Baker wanted to assure everyone that the trade of international goods and services remains intact. Policy makers need to make certain that bad deflation does not remain a contributor to the valuation of international trade, because if it does so, the real value of exports would eventually decline, much as the nominal value is already beginning to fall.